SEC Enforcement Update: A Wounded Animal is a Dangerous Animal

Securities Docket presented this webcast with Michael MacPhail, of Holland & Hart LLP and Patrick Hunnius of White & Case LLP. “In a sharp detour from the era of Chairman Christopher Cox, the SEC under new Chairman Mary Shapiro’s leadership has obtained big budget increases that will be used to increase the number of enforcement lawyers. It has also empowered its staff by streamlining procedures relating to the issuance of formal orders of investigation and negotiating civil penalties with corporations. The staff has responded enthusiastically to the change in regime by bringing an unprecedented number of emergency civil actions, cases involving Foreign Corrupt Practices Act violations, and cases targeting lawyers.” The materials are available on Securities Docket. These are my notes.

Michael MacPhail of Holland & Hart LLP started off by pointing out the beating the enforcement division has taken over the last year. The new administration has brought in some strong new leadership. (and its pissed off and wants some victories.) The SEC is touting its litigation victories and enforcement actions. It wants to be tough and is taking a “Get Tough” approach.

The SEC is also seeking lots of Temporary Restraining Orders. The TRO is ex parte so the company has no chance to present its case at the TRO hearing. The TRO also usually includes an asset freeze. These are “draconian” measures. Since the SEC is limiting funds, they are also limiting the defendants’ access to cash for legal fees. That makes it hard to keep lawyers in place. One example is the Stanford case where his lawyers quit and Stanford now has to defend himself.

How do you avoid a TRO? Talk with the SEC staff and let them know that you have removed the risk factors. Show proof that the bad acts have stopped. Convince the SEC that assets and funds are not moving. Try using escrow accounts and transparent accounts. You will also need to prove that you are actually taking those steps. The Wells Process has started changing from office to office and case to case on the defendants access to information about the case against them.

Patrick took over to focus on enforcement priorities that are likely here to stay and some likely new trends. He pointed out that FCPA enforcement has been on the increase. They are also look at attorneys and other professionals. These are attractive scalps. One of the likely areas of enforcement is the FCPA in the era of Sovereign Wealth Funds and the use of government bailout funds. Many Sovereign Wealth Funds can fall under the definition of foreign controlled enterprise under the FCPA.

There is no clear line of what amount of foreign ownership makes an entity an instrumentality of a foreign government. Majority ownership is probably enough. But minority interests may still be enough. Increased Sovereign Wealth Fund investment activity could transform ordinary business partners into a foreign government instrumentality. For example, 10% of Daimler is owned by a Sovereign Wealth Fund. Another example is the City Center project in Las Vegas which is joint venture of MGM and Dubai World. The owner of that project may be subject to the FCPA. There are very few compliance programs in place to deal with that scenario. You have to be cautious about the foreign government ownership of banks and financial companies. Icelandic banks are probably instrumentalities of a foreign government. Looking inward, Citibank, AIG, and Bank of America could be thought of as instrumentalities of the United States.

The SEC has raised the flag that they are going after gatekeepers, especially if it can be seen that the gatekeepers was heavily involved in the bad acts. Patrick pointed out how lawyers have got dragged into the back-dating of stock options scandal. Patrick looked at two cases. In US v. Collins, the attorney was found to have been involved in drafting loan documents to hide some of the REFCO losses. The attorney was also involved in drafting the SEC disclosure documents and did not disclose the bad things he saw or should have seen. In US v. Offill he worked with his client to get around the registration requirements in order to sell securities. He was accused of being part of a “pump and dump” schemes.

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